Switzerland: Personal Taxation

Introduction

Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas others are levied by the cantons, the communes and the federal authorities concurrently. Even among the cantons there are significant differences in both the taxes levied and the rates payable though there is current legislation that aims to reduce these differences.

In addition to the taxes described below, there is capital gains tax on real estate transactions averaging 18%, and a capital transfer tax on real estate transactions averaging 4% - however there are wide variations between cantons.

In March, 2004, Switzerland's parliament decided on reforms of the federal/cantonal fiscal equalisation system which includes provisions compensating for "bracket creep". Bracket creep occurs when salary increases related to inflation force workers into higher tax brackets, and under Swiss law, the government is required to address the situation when the accumulated inflation rate breaches the 7% mark.

A report in April 2004 from ratings agency Standard & Poor's concluded that the planned overhaul of the fiscal equalization system would likely reduce the differences in tax burden between each canton. "Under this system, due to go into effect in 2007, enhanced mutual support and lower exposure of budgetary performance to local economic strength could gain in significance as rating factors," forecasts Standard & Poor's credit analyst, Christian Esters.

"Nevertheless, the expected budget effects on individual cantons differ and specific rating impact on individual Swiss cantons cannot be evaluated at this stage," he added.

In February 2009, amid growing concerns over the effects of the global economic crisis, voters in the Swiss Canton Zurich elected to abolish the highly controversial flat rate tax or ‘Pauschalbesteuerung’ applicable to wealthy foreigners from 2010. The canton of Schaffhausen followed suit in 2011, as did Appenzell-Ausserhoden in March, 2012. Both government and parliament had previously rejected the bill but in June, 2011, government put forward a proposal to retain lump-sum taxation but to increase the calculation base from five times to seven times annual rental expenditure with a minimum federal calculation base of CHF400,000.

Some cantons have since voted to retain lump-sum taxation but to increase the calculation base to CHF600,000 and seven times annual rental expenditure.

Under current law, income or wealth tax may be replaced by a lump sum tax, provided that an individual is in possession of a residence permit, not gainfully employed in Switzerland, and has not worked in the country for at least ten years.

Critics have argued, however, that the system is unfair, that it violates the law to tax individuals according to their means, and that it serves to encourage tax evasion, whilst also contributing to rising property prices in affluent areas.

Originally intended to benefit retired individuals choosing to spend their twilight years in Switzerland, many believe the system is currently open to abuse.

A fear persists, however, that abolition of the lump sum tax will lead to an exodus of super-rich foreigners, either to other cantons in Switzerland or abroad, to the UK, the Benelux countries, Austria or Liechtenstein where similar tax breaks for foreigners still apply.

Whilst modifying cantonal and local tax law, however, direct federal tax remains unaffected by the decision.

Meanwhile, voters in the Swiss canton Vaud approved a number of measures designed to alleviate the tax burden on the middle classes, to support businesses, and to prevent the exodus of further wealthy residents from the area.

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